From the U.S. Government Accountability Office, www.gao.gov
Transcript for: USPS's Funding of Retiree Health Benefits
Description: Audio interview by GAO staff with Frank Todisco, Chief
Actuary, and Lorelei St. James, Director, Physical Infrastructure
Related GAO Work: GAO-13-112: U.S. POSTAL SERVICE: Status, Financial
Outlook, and Alternative Approaches to Fund Retiree Health Benefits
Released: January 2013
[ Background Music ]
[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's January
2013. The 2006 Postal Accountability and Enhancement Act requires the US
Postal Service to contribute to a health benefit fund for its future
retirees. Current payment requirements are about $5-1/2 billion a year,
and USPS has been unable to make them for the last two years. A group
led by Frank Todisco, GAO's chief actuary, and Lorelei St. James, a
director in GAO's Physical Infrastructure team, recently reviewed the
status and financial outlook of this fund as well as possible
alternative approaches to funding retiree health benefits. GAO's Jeremy
Cluchey sat down with Frank and Lorelei to learn more.
[ Jeremy Cluchey: ] Lorelei, why is the prefunding requirement of the
retiree health benefits fund such a challenge for the Postal Service?
[ Lorelei St. James: ] Well, Congress passed a law in 2006 that required
the Postal Service to make annual payments to a retiree healthcare fund
over a number of years. However, since 2006, the mail volume has really
dropped off significantly, and the gap between the Postal Service's
expenses and their revenue has grown significantly. In fact, in fiscal
year 2012, the Postal Service reported a net loss of $16 billion, which
included $11.1 billion in retiree health benefits payments that it was
unable to make. So the challenge is if the mail continues to decline,
it's just going to be harder for the Postal Service to make these
payments.
[Jeremy Cluchey:] And your team looked in detail at the current status
of the health benefits fund. What do you find there?
[ Jeremy Cluchey: ] Well, at the end of fiscal year 2012, OPM estimated
that the Postal Service's liability was almost $94 billion. And half
this $94 billion is for current retirees and beneficiaries, and half is
for current postal employees. And contrary to some misunderstandings
that were reported in the press, none of this liability is for employees
that are not yet hired or not yet born. And it has a balance of $46
billion, which means that it has funded 49 percent of the liability. And
that leaves an unfunded liability of about $48 billion, and we think
this is a sizeable amount given the losses that the Postal Service has
been experiencing.
[ Jeremy Cluchey: ] Frank, you helped lead a review of a few alternative
approaches to dealing with the Postal Service's obligations in this
area. Can you talk about what you found when you looked there?
[ Frank Todisco: ] Sure. Well first, Jeremy, we looked at six
alternative approaches to funding these benefits. Those included the
prefunding approaches that—an approach that is in current law, and those
that are in the Senate Bill, a House Bill, an Administration budget
proposal, plus an approach in letting the ceiling grow in which the fund
is temporarily left alone to grow with interest, and a pure
Pay-as-You-Go approach. So what we found is that two of the six
approaches would reduce the unfunded liabilities more aggressively, but
they would require significantly higher payments in the short term. The
other approaches would reduce the near-term payments, which would ease
the Postal Service's immediate cash flow problems. But these approaches
would increase the unfunded liability to differing degrees—sometimes
substantially—and require greater payments later. We also found that if
the Postal Service stopped prefunding entirely and used the existing
fund to pay benefits, that fund would be exhausted in just 14 years, by
2026.
[ Jeremy Cluchey: ] As policymakers look at this issue, what are some
of the considerations that GAO thinks are important to keep in mind?
[ Frank Todisco: ] We discussed several key issues for policymakers to
consider. One is simply the rationale for prefunding these benefits,
which has to do with protecting the viability of the enterprise as well
as equitable allocations of costs. Second is tradeoffs regarding the
Postal Service's financial condition, the size of annual payments and
unfunded liabilities, the allocation of costs between current and future
postal ratepayers, and the allocation of risk.
[ Jeremy Cluchey: ] Finally, Lorelei, for taxpayers under the impression
that the Postal Service is supposed to be a self-sustaining entity,
what's the bottom line of this report?
[ Lorelei St. James: ] Yes, this is the public's impression, and it is
correct. The Postal Service is intended to be self-sustaining and funded
almost entirely by postal ratepayers. But its financial losses are
really challenging its financial sustainability. And in the past, we've
reported that the Postal Service should prefund its retiree health
benefit liabilities to the extent that its finances allow it. But we and
the Postal Service have quickly come to realize that none of the
approaches that Frank talked about will work unless the Postal Service
has the ability to actually make the payments. The Postal Service missed
two of its annual retiree health benefits payments, and it's reached its
borrowing limit. And that's the reason why we have strongly urged
Congress and the Postal Service to develop a comprehensive package to
get the Postal Service out of the red and into the black.
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